INCONTACT, INC. FORM 10-Q/A. (Amended Quarterly Report) Filed 11/14/14 for the Period Ending 03/31/14

Transcription

1 INCONTACT, INC. FORM 10-Q/A (Amended Quarterly Report) Filed 11/14/14 for the Period Ending 03/31/14 Address 7730 S. UNION PARK AVE., SUITE 500 NONE MIDVALE, UT Telephone (801) CIK Symbol SAAS SIC Code Prepackaged Software Industry Software & Programming Sector Technology Fiscal Year 12/31 Copyright 2016, EDGAR Online, Inc. All Rights Reserved. Distribution and use of this document restricted under EDGAR Online, Inc. Terms of Use.

2 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, DC FORM 10-Q/A Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended March 31, 2014 Commission File No incontact, Inc. (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of (IRS Employer incorporation or organization) Identification No.) 7730 S. Union Park Avenue, Suite 500, Salt Lake City, UT (Address of principal executive offices and Zip Code) (801) (Registrant s telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T ( of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Indicate the number of shares outstanding of each of the issuer s classes of common stock, as of the latest practicable date: Class Outstanding as of April 29, 2014 Common Stock, $ par value 56,461,023 shares Yes No

3 Explanatory Note Subsequent to the issuance of incontact, Inc. s ( we, the Company or incontact ) 2014 Quarterly Condensed Consolidated Financial Statements as of and for the three months ended March 31, 2014, we identified errors related to the calculation and assessment of state sales tax for certain of our products and services and the appropriate accounting for the related state sales tax obligations. We determined that the errors were not material to any period presented, but concluded that the related control deficiency that allowed the error to occur and not be detected on a timely basis amounted to a material weakness in our internal controls over financial reporting. As a result, we are filing this amendment (Amendment) to our Quarterly Report on Form 10-Q for the period ended March 31, 2014 (Original Form 10-Q) filed with the Securities and Exchange Commission ( SEC ) on May 9, 2014 (Original Filing Date) to reflect changes in our assessment of internal controls over financial reporting and disclosure controls and procedures. We have also included in this Amendment an adjustment to correct an immaterial error related to our income tax provision as of March 31, We have restated our financial statements and related disclosures to correct the immaterial errors in each period presented. Concurrently with the filing of this Amendment, the Company is filing an amendment to its Annual Report on form 10-K and Quarterly Report on Form 10-Q for the three and six months ended June 30, Revisions to the Original Form 10-Q include the following: (A) Amendments to Part I, Item 1 - Financial Statements, to reflect the restatement of our financial results. (B) Amendments to Part I, Item 2 - Management s Discussion and Analysis of Financial Condition and Results of Operations, to reflect the restatement of our financial results. (C) Amendments to Part I, Item 4 - Controls and Procedures, to (i) describe changes in our disclosure controls and procedures and our internal controls over financial reporting to address a material weakness and (ii) modify management s opinion on the effectiveness of our internal controls over financial reporting as of March 31, ( D ) Amendments to Part II, Item 1A - Risk Factors, to add an additional risk factor regarding the potential adverse impact the material weakness could have on our business, results of operations, financial condition and liquidity. (E) Part II, Item 6 Exhibits and Financial Statement Schedule, including exhibits 31.1 and 31.2 Except as described in this Explanatory Note, the Condensed Consolidated Financial Statements and financial statement footnote disclosures in the original Form10-Q are unchanged. In particular, except for the events described above, this Amendment has not been updated to reflect any events that have occurred after the original Form 10-Q was filed or to modify or update disclosures affected by other subsequent events, except where required by GAAP. Accordingly, forward-looking statements included in this Amendment represent management s views as of the Original Filing Date and should not be assumed to be accurate as of any date thereafter. This Amendment should be read in conjunction with the Company s other filings with the SEC, together with any amendments to those filings. 2

4 TABLE OF CONTENTS ITEM NUMBER AND CAPTION PART I FINANCIAL INFORMATION Page Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013 (unaudited) 4 Condensed Consolidated Statements of Operations and Comprehensive Loss for the Three Months Ended March 31, 2014 and 2013 (unaudited) 5 Condensed Consolidated Statement of Stockholders Equity for the Three Months Ended March 31, 2014 (unaudited) 6 Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2014 and 2013 (unaudited) 7 Notes to Condensed Consolidated Financial Statements (unaudited) 8 Item 2. Management s Discussion and Analysis of Financial Condition and Results of Operations 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk 24 Item 4. Controls and Procedures 24 PART II OTHER INFORMATION Item 1. Legal Proceedings 25 Item 1A. Risk Factors 26 Item 2. Unregistered Sale of Equity Securities and Use of Proceeds 26 Item 6. Exhibits 27 Signatures 28 3

5 INCONTACT, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) (in thousands, except per share data) See accompanying notes to condensed consolidated financial statements. March 31, 2014 December 31, 2013 ASSETS Current assets: Cash and cash equivalents $ 44,669 $ 49,148 Restricted cash Accounts and other receivables, net of allowance for uncollectible accounts of $2,213 and $2,203, respectively 20,591 18,682 Other current assets 4,907 4,360 Total current assets 70,248 72,271 Property and equipment, net 26,542 23,716 Intangible assets, net 3,803 3,971 Goodwill 6,563 6,563 Other assets 1,586 1,540 Total assets $ 108,742 $ 108,061 LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Trade accounts payable $ 9,156 $ 9,696 Accrued liabilities 7,904 8,772 Accrued commissions 2,137 2,072 Current portion of deferred revenue 2,571 2,440 Current portion of debt and capital lease obligations 3,976 3,461 Total current liabilities 25,744 26,441 Long-term portion of debt and capital lease obligations 4,965 4,580 Deferred rent Deferred tax liability Deferred revenue 4,279 3,981 Total liabilities 35,687 35,721 Stockholders equity: Common stock, $ par value; 100,000 shares authorized; 55,787 and 55,346 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively 6 6 Additional paid-in capital 169, ,422 Accumulated deficit (96,836) (95,088) Total stockholders equity 73,055 72,340 Total liabilities and stockholders equity $ 108,742 $ 108,061 4

6 INCONTACT, INC. CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS and COMPREHENSIVE LOSS (Unaudited) (in thousands, except per share data) Three months ended March 31, Net revenue: Software $ 20,009 $ 16,172 Network connectivity 17,045 15,473 Total net revenue 37,054 31,645 Costs of revenue: Software 8,235 6,435 Network connectivity 10,838 10,033 Total costs of revenue 19,073 16,468 Gross profit 17,981 15,177 Operating expenses: Selling and marketing 10,056 8,422 Research and development 3,760 2,771 General and administrative 5,608 5,309 Total operating expenses 19,424 16,502 Loss from operations (1,443) (1,325) Other income (expense): Interest expense (111) (60) Other expense (151) (25) Total other expense (262) (85) Loss before income taxes (1,705) (1,410) Income tax expense (19) (17) Net loss and comprehensive loss $ (1,724) $ (1,427) Net loss per common share: Basic and diluted $ (0.03) $ (0.03) Weighted average common shares outstanding: Basic and diluted 56,145 53,594 See accompanying notes to condensed consolidated financial statements. 5

7 INCONTACT, INC. CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (Unaudited) (in thousands) Common Stock Additional Paid-in Treasury Stock Accumulated Shares Amount Capital Shares Amount Deficit Total Balance at December 31, ,346 $ 6 $ 167,422 $ $ (95,088) $ 72,340 Common stock issued for options exercised 383 1,247 1,247 Common stock issued under the employee stock purchase plan Common stock received for settlement of taxes and forfeited restricted stock (52) (24) (24) Issuance of restricted stock (24) Stock-based compensation 1,048 1,048 Net loss (1,724) (1,724) Balance at March 31, ,787 $ 6 $ 169,885 $ $ (96,836) $ 73,055 See accompanying notes to condensed consolidated financial statements. 6

8 INCONTACT, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) Three months ended March 31, Cash flows from operating activities: Net loss $ (1,724) $ (1,427) Adjustments to reconcile net loss to net cash provided by operating activities: Depreciation of property and equipment 1,578 1,392 Amortization of software development costs 1,461 1,079 Amortization of intangible assets Amortization of note financing costs 7 4 Interest accretion 1 2 Stock-based compensation 1, Loss on disposal of property and equipment Changes in operating assets and liabilities, net of business acquisition: Accounts and other receivables, net (1,909) (2,038) Other current assets (547) (120) Other non-current assets (46) (195) Trade accounts payable Accrued liabilities (870) (926) Accrued commissions Deferred rent (18) 16 Deferred revenue Net cash provided by operating activities Cash flows from investing activities: Payments made for deposits (11) Acquisition of assets (1,923) Capitalized software development costs (2,289) (1,476) Purchases of property and equipment (3,189) (695) Net cash used in investing activities (5,478) (4,105) Cash flows from financing activities: Proceeds from exercise of options 1,223 1,164 Proceeds from sale of stock under employee stock purchase plan Principal payments under debt and capital lease obligations (810) (680) Payments under the revolving credit agreement (1,000) Net cash provided by (used in) financing activities 581 (425) Net decrease in cash and cash equivalents (4,479) (4,065) Cash and cash equivalents at beginning of period 49,148 48,836 Cash and cash equivalents at end of period $ 44,669 $ 44,771 Supplemental schedule of non-cash investing and financing activities: Payments due for property and equipment included in trade accounts payable $ 155 $ 87 Contingent consideration included in accrued liabilities $ 145 $ Property and equipment financed through capital leases $ 1,702 $ Common stock received for settlement of accounts receivable $ $ 2,731 See accompanying notes to condensed consolidated financial statements. 7

9 INCONTACT, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION Organization incontact, Inc. ( incontact, we, us, our, or the Company ) is incorporated in the state of Delaware. We provide cloud contact center software solutions through our incontact portfolio, an advanced contact handling and performance management software application. Our services provide a variety of connectivity options for carrying inbound calls to our incontact portfolio or linking agents to our incontact applications. We provide customers the ability to monitor agent effectiveness through our user survey tools and the ability to efficiently monitor their agent needs. We are also an aggregator and provider of network connectivity services (formerly telecommunications). We contract with a number of third party providers for the right to resell the various network connectivity services and products they provide, and then offer all of these services to the customers. These services and products allow customers to buy only the network connectivity services they need, combine those services in a customized enhanced contact center package, receive one bill for those services, and call a single point of contact if a service problem or billing issue arises. Basis of Presentation These unaudited Condensed Consolidated Financial Statements of incontact and its subsidiaries have been prepared in accordance with the rules and regulations of the SEC. Such rules and regulations allow the omission of certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, so long as the statements are not misleading. In the opinion of management, these financial statements and accompanying notes contain all adjustments (consisting of normal recurring adjustments) necessary to present fairly the financial position and results of operations for the periods presented herein. These Condensed Consolidated Financial Statements should be read in conjunction with the consolidated audited financial statements and notes thereto contained in the Annual Report on Form 10-K/A for the year ended December 31, 2013, filed with the SEC on November 14, The results of operations for the three month period ended March 31, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, Our significant accounting policies are set forth in Note 1 to the Consolidated Financial Statements in the 2013 Annual Report on Form 10-K/A. Revenue Recognition Revenue is recognized when all of the following four criteria are met: (1) persuasive evidence of an arrangement exists, (2) the fee is fixed or determinable, (3) collection is reasonably assured, and (4) delivery has occurred or services have been rendered. Revenue is determined and recognized based on the type of service provided for the customer as follows: incontact portfolio of services. We derive revenue from the delivery of any of our software services within the incontact portfolio which are provided on a monthly recurring subscription basis. Because customers do not have the right to take possession of the software, we consider these arrangements to be service contracts and are not within the scope of Industry Topic 985, Software. We generally bill monthly recurring subscription charges in arrears and recognize these charges in the period in which they are earned. For subscription contracts with multiple elements (hosted software, training, implementation and long distance services), we follow the guidance provided in Accounting Standards Codification ( ASC ) , Revenue Recognition for Multiple-Element Arrangement. In addition to the monthly recurring subscription revenue, we also derive revenue on a non-recurring basis for professional services included in implementing or improving a customer s incontact portfolio experience. Because our professional services, such as training and implementation, are not considered to have standalone value, we defer revenue for upfront fees received for professional services in multiple element arrangements and recognize such fees as revenue over the estimated life of the customer. We recognize professional services sold separately (i.e. not sold contemporaneously with the negotiation of a subscription contract) as revenue over the period that services are provided. Fees for network connectivity services in multiple element arrangements within the incontact portfolio on usage and recognize revenue in the same manner as fees for network connectivity services discussed in the following paragraph. We also include the quarterly minimum purchase commitments from a related party reseller in revenue (Note 13). 8

10 Network connectivity services. Revenue is derived from network connectivity, such as dedicated transport, switched long distance and data services. These services are provided over our network or through third party network connectivity providers. Our network is the backbone of our incontact portfolio and allows us to provide the all-in-one incontact solution. Revenue for the network connectivity usage is derived based on customer specific rate plans and the customer s call usage and is recognized in the period the call is initiated. Customers are also billed monthly charges in arrears and revenue is recognized for such charges over the billing period. If the billing period spans more than one month, earned but unbilled revenues are recognized as revenue for incurred usage to date. Internal Use Software We capitalize certain costs incurred for the development of internal use software which are included as internal use software in property and equipment in the Condensed Consolidated Balance Sheets. These costs include the costs associated with coding, software configuration, upgrades and enhancements that are incurred during the application development stage. NOTE 2. RESTATEMENT OF FINANCIAL STATEMENTS Subsequent to the issuance of the Company s first quarter 2014 Condensed Consolidated Financial Statements, we determined that errors existed in the Company s previously issued Condensed Consolidated Financial Statements. As a result, the accompanying Condensed Consolidated Financial Statements have been restated to correct for such errors, as described below. Management s decision to restate the aforementioned financial statements was made as a result of the identification of errors related to the calculation and assessment of state sales tax for certain of our products and services and the appropriate accounting for the related state sales tax obligations which cannot now be collected from customers due to the amount of time that has lapsed. The principal effect of the restatement adjustments is to increase net loss by $340,000 and $264,000 (including increasing General and Administrative expense by the same amount) for the three months ended March 31, 2014 and 2013, respectively, and increase accrued liabilities by the corresponding amount. Additionally, the Company identified an error related to the March 31, 2014 tax provision. The principal effect of the restatement adjustment is to decrease net loss by $8,000 (including decreasing income tax expense) and decrease income tax payable by the same amount for the three months ended March 31, 2014 The impact of the restatement adjustments on specific line items on the Company s previously issued Condensed Consolidated Balance Sheet and Consolidated Statement of Stockholders Equity as of March 31, 2014 and its Condensed Consolidated Statements of Operations and Comprehensive Loss and Consolidated Statement of Cash Flows for the three months ended March 31, 2014 and 2013 are presented below ( in thousands, except per share amounts ): Condensed Consolidated Balance Sheet as of March 31, 2014 As Previously Reported Adjustments As Restated Other current assets $ 4,764 $ 143 $ 4,907 Total current assets 70, ,248 Total assets 108, ,742 Accrued liabilities 5,282 2,622 7,904 Total current liabilities 23,122 2,622 25,744 Deferred tax liability Total liabilities 32,833 2,854 35,687 Accumulated deficit (94,125) (2,711) (96,836) Total stockholders equity 75,766 (2,711) 73,055 9

11 Condensed Consolidated Statement of Operations and Comprehensive Loss three months ended March As Previously Reported Adjustments As Restated General and administrative $ 5,268 $ 340 $ 5,608 Total operating expenses 19, ,424 Loss from operations (1,103) (340) (1,443) Loss before income taxes (1,365) (340) (1,705) Income tax expense (27) 8 (19) Net loss and comprehensive loss (1,392) (332) (1,724) Net income (loss) per common share: Basic and Diluted $ (0.02) $ (0.01) $ (0.03) Condensed Consolidated Statement of Operations and Comprehensive Loss three months ended March As Previously Reported Adjustments As Restated General and administrative $ 5,045 $ 264 $ 5,309 Total operating expenses 16, ,502 Loss from operations (1,061) (264) (1,325) Loss before income taxes (1,146) (264) (1,410) Net loss and comprehensive loss (1,163) (264) (1,427) Net income (loss) per common share: Basic and Diluted $ (0.02) $ (0.01) $ (0.03) Consolidated Statement of Cash Flows for the three months ended March 31, 2014 As Previously Reported Adjustments As Restated Net loss $ (1,392) $ (332) $ (1,724) Accrued liabilities (1,202) 332 (870) Consolidated Statement of Cash Flows for the three months ended March 31, 2013 As Previously Reported Adjustments As Restated Net loss $ (1,163) $ (264) $ (1,427) Increase in Accrued liabilities (1,190) 264 (926) Consolidated Statement of Stockholders Equity for the three months ended March 31, 2014 As Previously Reported Adjustments As Restated Net loss $ (1,392) $ (332 ) $ (1,724) The Company believes that the effects of these errors are not material to the previously issued Condensed Consolidated Financial Statements. 10

12 NOTE 3. ASSET ACQUISITION In March 2013, we acquired technology for $1.9 million in cash, which we used to add mobile and social features in our existing applications. In April and June 2013, development earnout measures were achieved resulting in additional payments totaling $800,000. The value of the assets acquired was recorded as in process technology and is included in internal use software. In December 2013, we determined that $545,000 of the acquired technology would not be utilized in the foreseeable future and therefore was disposed. NOTE 4. BASIC AND DILUTED NET (LOSS) INCOME PER COMMON SHARE Basic earnings per common share is computed by dividing the net income or loss applicable to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings per common share is computed by dividing the net income or loss by the sum of the weighted-average number of common shares outstanding plus the weighted average common stock equivalents, which would have been outstanding if the potentially dilutive securities had been issued. Potentially dilutive securities include outstanding options and restricted stock. The dilutive effect of potentially dilutive securities is reflected in diluted earnings per common share by application of the treasury method. As a result of incurring a net loss for the three months ended March 31, 2014 and 2013, no potentially dilutive securities are included in the calculation of diluted earnings per share because such effect would be anti-dilutive. We had potentially dilutive securities representing approximately 3.9 million and 5.0 million shares of common stock at March 31, 2014 and 2013, respectively. NOTE 5. FAIR VALUE OF FINANCIAL INSTRUMENTS The accounting guidance for fair value measurements defines fair value, establishes a market-based framework or hierarchy for measuring fair value and expands disclosures about fair value measurements. The guidance is applicable whenever assets and liabilities are measured and included in the financial statements at fair value. The fair value of a financial instrument is the amount that could be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Financial assets are marked to bid prices and financial liabilities are marked to offer prices. Fair value measurements do not include transaction costs. The fair value hierarchy prioritizes the quality and reliability of the information used to determine fair values. Categorization within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The fair value hierarchy is defined into the following three categories: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data. Level 3: Unobservable inputs that are not corroborated by market data. Fair Value of Other Financial Instruments The carrying amounts reported in the accompanying Condensed Consolidated Balance Sheets for cash and cash equivalents, accounts and other receivables, and trade accounts payable approximate fair value because of the immediate or short-term maturities of these financial instruments and are considered to be classified within Level 2 of the fair value hierarchy, except for cash and cash equivalents which is Level 1. The fair values of the revolving credit note, promissory notes payable and term loans were computed using a discounted cash flow model using estimated market rates adjusted for our credit risk as of March 31, 2014 and We consider the input related to our credit risk to be within Level 3 of the fair value hierarchy due to the limited number of our debt holders and our inability to observe current market information. We estimated our current credit risk as of March 31, 2014 and 2013 based on recent transactions with our creditors. The carrying value and estimated fair value of our revolving credit note, promissory notes payable and term loans are as follows ( in thousands ): Carrying Value March 31, 2014 December 31, 2013 Estimated Fair Value Carrying Value Estimated Fair Value Promissory notes $ 486 $ 486 $ 694 $ 694 Term loans $ 5,889 $ 5,889 $ 6,223 $ 6,223 NOTE 6. ACQUISITION OF A BUSINESS In December 2012, we entered into an agreement with Transcend Products LLC ( Transcend ) pertaining to the potential acquisition of Transcend to provide enhanced functionality for our existing service offerings. The option to purchase Transcend was exercised and the purchase closed in July 2013 for $2.7 million in cash and 376,459 shares of our common stock valued at $2.9 million, which was 11

13 discounted from $3.0 million in the purchase agreement for the lack of marketability. Furthermore, if the acquisition generates certain levels of revenue during the two-year period beginning in August 2013, we will pay to Transcend an additional earnout payment of $1.0 million in cash or shares of our common stock. As of the date of acquisition, this contingent liability has been recorded in accrued liabilities at its fair market value of $145,000 and was included as part of the purchase consideration. At March 31, 2014, the fair market value remained unchanged. The purchase price allocations for our acquisition of Transcend Products were prepared by the Company s management utilizing a valuation report, which was prepared in accordance with the provisions of ASC 805 Business Combination, and other tools available to the Company, including conversations with Transcend s management and projections of revenues and expenses. The fair values of the intangible assets were determined primarily using the income approach and the discount rates range from 13.4% to 16.4%. The total purchase price, which includes the contingent consideration liability above, was preliminarily allocated as follows (in thousands): July 2, 2013 Property and equipment, net $ 29 Intangible assets, net 3,249 Goodwill 2,477 Total assets acquired $ 5,755 In connection with the acquisition, we incurred professional fees of $23,000, including transaction costs such as legal and valuation services, which were expensed as incurred. These costs are included within general and administrative expenses in the Condensed Consolidated Statements of Operations. The premium paid over the fair value of the net assets acquired in the purchase, or goodwill, was primarily attributed to buyer synergies and assembled workforce. All of the goodwill was assigned to the software segment. Intangible assets acquired resulting from the acquisition include customer relationships, patents and technology, which are amortized on a straight-line basis. The following sets forth the intangible assets purchased as part of the Transcend acquisition and their economic useful life at the date of acquisition (in thousands, except useful life): Gross Assets March 31, 2014 Accumulated Amortization Intangible Assets, net Economic Useful Life (in years) Customer relationships $ 168 $ (37) $ Patents 2,168 (163) 2, Technology 913 (139) Total intangible assets $ 3,249 $ (339) $ 2,910 NOTE 7. INTANGIBLE ASSETS Intangible assets consisted of the following ( in thousands ): Gross Assets March 31, 2014 December 31, 2013 Accumulated Intangible Gross Accumulated Amortization Assets, net Assets Amortization Amortization expense was $168,000 and $53,000 during the three months ended March 31, 2014 and 2013, respectively Intangible Assets, net Customer lists and relationships acquired $ 16,663 $ (16,380) $ 283 $ 16,663 $ (16,354) $ 309 Technology and patents 13,312 (10,469) 2,843 13,312 (10,347) 2,965 Trade names and trade marks 1,194 (571) 623 1,194 (551) 643 Domain name Total intangible assets $ 31,223 $ (27,420) $ 3,803 $ 31,223 $ (27,252) $ 3,971 Based on the recorded intangibles at March 31, 2014, estimated amortization expense is expected to be $493,000 during the remainder of 2014, $587,000 in 2015, $581,000 in 2016, $483,000 in 2017, $388,000 in 2018 and $1.2 million thereafter. 12

14 NOTE 8. ACCRUED LIABILITIES Accrued liabilities consisted of the following ( in thousands ): March 31, 2014 December 31, 2013 Accrued payroll and other compensation $ 2,508 $ 3,687 Excess recovery reserve 966 1,157 Accrued state sales taxes 2,629 2,289 Accrued vendor charges Other 1,271 1,045 Total accrued liabilities $ 7,904 $ 8,772 NOTE 9. DEBT AND CAPITAL LEASE OBLIGATIONS Revolving Credit Agreement On July 16, 2009, we entered into a revolving credit loan agreement ( Revolving Credit Agreement ) with Zions, which was subsequently amended in June Under the terms of the Revolving Credit Agreement, Zions agreed to loan up to $15.0 million. The Revolving Credit Agreement is collateralized by substantially all the assets of incontact. The balance outstanding under the Revolving Credit Agreement cannot exceed the lesser of (a) $15.0 million or (b) the sum of 85% of eligible billed receivables, and 65% of eligible earned, but unbilled receivables as calculated on the 5th and 20th of each month. The interest rate on the Revolving Credit Agreement with Zions is 4.0% per annum above the ninety day LIBOR and the term is until July There was $15.0 million of unused commitment at March 31, 2014, based on the maximum available advance amount calculated on the March 20, 2014 borrowing base certificate. Interest under the Revolving Credit Agreement is paid monthly in arrears, and any outstanding principal is due in July There was no outstanding balance on our Revolving Credit Agreement at March 31, 2014 and December 31, The Zions Revolving Credit Agreement contains certain covenants, which were established by amendment to the Revolving Credit Agreement in June As of March 31, 2014, the most significant covenants require that the aggregate value of cash, cash equivalents and marketable securities shall not be less than the outstanding balance on the Revolving Credit Agreement plus $2.5 million, and if at any time the aggregate value is less than the minimum liquidity position, a minimum quarterly EBITDA of $2.5 million, calculated as of the last day of each calendar quarter, is required. We are in compliance with the covenants at March 31, The Revolving Credit Agreement imposes certain restrictions on incontact s ability, without the approval of Zions, to incur additional debt, make distributions to stockholders, or acquire other businesses or assets. Promissory Note During the three months ended March 31, 2014, we paid $208,000 of the promissory note payable ( Promissory Note ) to Zions. The Promissory Note balance was $486,000 at March 31, Term Loan In April 2012, we entered into a term loan agreement ( 2012 Term Loan ) with Zions for $4.0 million, which matures in May We drew $4.0 million on the 2012 Term Loan in April Interest is paid monthly in arrears and the principal is paid in 36 equal monthly installments and commenced in September The interest rate under the Term Loan is 4.5% per annum above the ninety day LIBOR rate, adjusted as of the date of any change in the ninety day LIBOR. The financial covenants are the same as the Revolving Credit Agreement. In June 2013, we also entered into a term loan agreement ( 2013 Term Loan ) with Zions for $4.0 million, which matures in June We are allowed to draw on the 2013 Term Loan through June 2014 and the interest rate is 4.25% per annum above the ninety day LIBOR. We drew $3.0 million on the 2013 Term Loan in December The principal will be paid in 36 equal monthly installments commencing in August 2014 and we may prepay any portion of the 2013 Term Loan without penalty or premium. The 2013 Term Loan is collateralized by the same assets as the Revolving Credit Agreement. During the three months ended March 31, 2014, we paid $333,000 of total term loan principal to Zions. The total term loan balance was $5.9 million at March 31,

15 Capital Leases During the three months ended March 31, 2014, we paid $269,000 of capital lease obligations. The balance of the capital lease obligations was $916,000 at March 31, NOTE 10. CAPITAL TRANSACTIONS During the three months ended March 31, 2014, we received 52,000 shares of our common stock from cancelled restricted stock from terminated employees and for the settlement of $24,000 in payroll taxes. We received proceeds of $1.2 million from the exercise of 383,000 options during the three months ended March 31, We issued 25,000 shares of common stock for proceeds of $168,000 under the employee stock purchase plan during the three month period ended March 31, NOTE 11. COMMITMENTS AND CONTINGENCIES In May 2009, the Company was served in a lawsuit titled California College, Inc., et al., v. UCN, Inc., et al. In the lawsuit, California College alleges that (1) the Company made fraudulent and/or negligent misrepresentations in connection with the sale of its services with those of Insidesales.com, Inc., another defendant in the lawsuit, (2) that the Company breached its service contract with California College and an alleged oral contract between the parties by failing to deliver contracted services and product and failing to abide by implied covenants of good faith and fair dealing, and (3) the conduct of the Company interfered with prospective economic business relations of California College with respect to enrolling students. Pursuant to a motion filed by Insidesales.com, California College filed an amended complaint that has been answered by Insidesales.com and the Company. California College originally sought damages in excess of $20.0 million. Furthermore, Insidesales.com and the Company filed cross-claims against one another, which they subsequently agreed to dismiss with prejudice. In October 2011, California College reached a settlement with Insidesales.com, the terms of which have not been disclosed and remain confidential. In June of 2013, California College amended its damages claim to $14.4 million, of which approximately $5.0 million was alleged pre-judgment interest. On September 10, 2013, the court issued an order on the Company's Motion for Partial Summary Judgment. The court determined that factual disputes exist as to several of the claims, but dismissed California College's cause of action for intentional interference with prospective economic relations and the claim for prejudgment interest. Dismissing the claim for prejudgment interest effectively reduced the claim for damages to approximately $9.2 million. incontact has denied all of the substantive allegations of the complaint and continues to defend the claims. Management believes the claims against the Company are without merit. The Company does not believe the probable loss is material. On January 15, 2014, Microlog Corporation ( Microlog ) filed a patent infringement suit against the Company in the Federal District Court for the District of Delaware. The Complaint alleges that the Company has infringed a patent owned by Microlog. The Company is defending this case vigorously and Management believes the allegations to be without merit. However, no estimate of the loss or range of loss can be made. On March 20, 2014, Pragmatus Telecom, LLC ( Pragmatus ) filed a patent infringement suit against incontact in the Federal District Court for the District of Delaware. The Complaint alleges that incontact has infringed a patent owned by Pragmatus. incontact is defending this case vigorously and Management believes the allegations to be without merit. However, no estimate of the loss or range of loss can be made. On May 2, 2014, Info Directions, Inc. ( IDI ) notified incontact of a Demand for Arbitration regarding a dispute related to the Software as a Service Agreement between IDI and incontact dated December 19, 2012 ( Agreement ) pursuant to which IDI was to provide incontact with billing systems software. On April 8, 2014 InContact gave IDI notice of IDI breach of the Agreement. incontact is defending this arbitration vigorously and Management believes the allegations to be without merit. However, no estimate of the loss or range of loss can be made. We are the subject of certain other legal matters considered incidental to our business activities. It is the opinion of management that the ultimate disposition of these matters will not have a material impact on our financial position, liquidity or results of operations. NOTE 12. STOCK-BASED COMPENSATION Stock-based compensation cost is measured at the grant date based on the fair value of the award granted and recognized as expense using the graded-vesting method over the period in which the award is expected to vest. Stock-based compensation expense recognized during a period is based on the value of the portion of stock-based awards that is ultimately expected to vest during the period. As stock-based compensation expense recognized in the results for the year is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. 14

16 We record stock-based compensation expense (including stock options, restricted stock and employee stock purchase plan) to the same departments where cash compensation is recorded as follows ( in thousands ): Three months ended March 31, Costs of revenue $ 139 $ 149 Selling and marketing Research and development General and administrative Total stock-based compensation expense $ 1,048 $ 775 We utilize the Black-Scholes model to determine the estimated fair value for grants of stock options. The Black-Scholes model requires the use of highly subjective and complex assumptions to determine the fair value of stock-based awards, including the option s expected term, expected dividend yield, the risk-free interest rate and the price volatility of the underlying stock. The expected dividend yield is based on our historical dividend rates. Risk-free interest rates are based on U.S. treasury rates. Volatility is based on historical stock prices over a period equal to the estimated life of the option. Stock options are issued at the current market price on the date of grant and prior to December 31, 2013 were generally subject to a three-year vesting period with a contractual term of five years. Stock options issued subsequent to December 31, 2013 are generally subject to a four-year vesting period with a contractual term of ten years. The grant date fair value of the restricted stock is calculated using the closing market price of the Company s common stock on the grant date, with the compensation expense amortized over the vesting period of the restricted stock awards, net of estimated forfeitures. We estimate the fair value of options granted under our employee stock-based compensation arrangements at the date of grant using the Black- Scholes model using the following weighted-average assumptions as follows: Three months ended March 31, Dividend yield None None Volatility 64 % 54 % Risk-free interest rate 1.97 % 0.60 % Expected life (years) During the three months ended March 31, 2014, we granted 920,000 stock options with exercise prices ranging from $8.02 to $10.19 and a weighted-average fair value of $5.06 and 293,000 restricted stock awards with a weighted-average fair value of $8.87. As of March 31, 2014, there was $6.6 million of unrecognized compensation cost related to non-vested stock-based compensation awards granted under our stock-based compensation plans. The compensation cost is expected to be recognized over a weighted average period of 2.2 years. In November 2013, our Chief Executive Officer had 398,505 options expire where the Company s stock price exceeded the exercise price of the options. Also in November 2013, our Compensation Committee awarded 232,868 shares of restricted stock to our Chief Executive Officer. These transactions were accounted for as a modification and did not result in any additional fair market value because the market value of the restricted stock awarded approximated the market value of the expired options. NOTE 13. RELATED PARTY TRANSACTIONS On February 13, 2013, we amended the Unify, Inc. ( Unify ) (formerly Siemens Enterprise Communications) reseller agreement which modified Unify s minimum purchase commitments to be $4.5 million for 2012, $7.0 million for 2013 and extended the minimum purchase commitment obligation into 2014 in the amount of up to $5.0 million, which may be credited up to $1.0 million in 2014 in consideration for up to a $1.0 million investment by Unify in sales and marketing of our cloud contact center software solutions. Under the amendment Unify relinquished exclusivity in Europe, the Middle East and Asia ( EMEA ). Additionally, sales made by other resellers and incontact in EMEA will go toward satisfying Unify s minimum purchase commitment obligation. 15

17 In February 2013, we agreed that through 2013, Unify could make payment of its obligations with shares of our common stock held by Unify s parent company at a price per share, discounted 9.0% from the volume weighted average price, averaged over a specified period of five trading days prior to the payment date. $2.7 million in revenue earned from Unify during 2012 was paid by the delivery of 492,000 shares of our common stock by Unify in In May 2013, the parent company of Unify sold its remaining 6.4 million shares of our common stock in the open market. Accordingly, future payments by Unify under the reseller agreement will be in cash. In that regard, Unify paid to incontact a total of $3.5 million in May 2013, which was applied to outstanding amounts owed and the minimum commitment payment obligations of Unify under the reseller agreement through March 31, There was no unapplied balance of the $3.5 million payment at March 31, Under this arrangement, we recognized software revenue of $1.7 million during the three months ended March 31, 2014 and $1.7 million during three months ended March 31, 2013, which included revenue from resold software services and amounts up to the quarterly minimum revenue purchase commitments. Under the arrangement, revenue from resold software services reduces the reseller s obligation up to the amount of the quarterly minimum purchase commitments. As of March 31, 2014, Unify continues to resell our software services and has met its obligations under the revised reseller agreement; however, we believe that resold recurring software revenue will not meet the final quarterly gross minimum purchase commitment of $1.5 million in the third quarter of We paid the Chairman of the Board of Directors (the Chairman ) $7,000 per month during the three months ended March 31, 2014, and 2013 for consulting, marketing and capital raising activities. We owed the Chairman $7,000 at March 31, 2014 and December 31, NOTE 14. SEGMENTS We operate under two business segments: Software and Network connectivity. The Software segment includes all monthly recurring revenue related to the delivery of our software applications, plus the associated professional services and setup fees, and revenue related to quarterly minimum purchase commitments, from a related party reseller (Note 13). The Network connectivity segment includes all voice and data long distance services provided to customers. Management evaluates segment performance based on operating data (revenue, costs of revenue, and other operating expenses). Management does not evaluate and manage segment performance based on assets. For segment reporting, we classify operating expenses as either direct or indirect. Direct expense refers to costs attributable solely to either selling and marketing efforts or research and development efforts. Indirect expense refers to costs that management considers to be overhead in running the business. In evaluating segment performance, management evaluates expenditures for both selling and marketing and research and development efforts at the segment level without the allocation of overhead expenses, such as rent, utilities and depreciation on property and equipment. Operating segment revenues and profitability for the three months ended March 31, 2014 and 2013 were as follows ( in thousands, except percentages ): Three months ended March 31, 2014 Three months ended March 31, 2013 Network Network Software Connectivity Consolidated Software Connectivity Consolidated Net revenue $ 20,009 $ 17,045 $ 37,054 $ 16,172 $ 15,473 $ 31,645 Costs of revenue 8,235 10,838 19,073 6,435 10,033 16,468 Gross profit 11,774 6,207 17,981 9,737 5,440 15,177 Gross margin 59 % 36 % 49 % 60 % 35 % 48 % Operating expenses: Direct selling and marketing 8, ,570 6, ,955 Direct research and development 3,474 3,474 2,539 2,539 Indirect 5, ,380 4,919 1,089 6,008 Income (loss) from operations $ (5,987) $ 4,544 $ (1,443) $ (4,684) $ 3,359 $ (1,325) 16

18 NOTE 15. SUBSEQUENT EVENT On May 6, 2014, we acquired CallCopy, Inc., a Delaware corporation doing business as Uptivity ( Uptivity ). Uptivity provides a complete mid-market workforce optimization suite of services to call centers comprised of speech and desktop analytics, agent coaching, call and desktop recording, as well as quality, performance, workforce management and satisfaction surveys. There were no material relationships between incontact and any of the stockholders of Uptivity prior to the acquisition. The purchase price was approximately $50.2 million, including Uptivity s unaudited adjusted net current assets of approximately $5.8 million as of the closing date, which was estimated for purposes of closing and subject to adjustment in certain circumstances and verification in a final closing balance sheet for Uptivity. The purchase price was paid with cash in the amount of $14.6 million and 4,256,244 shares of the Company s common stock valued at $35.6 million. 17

19 ITEM 2. MANAGEMENT S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of financial condition and results of operations should be read in conjunction with the audited December 31, 2013 Consolidated Financial Statements and notes thereto, along with Management s Discussion and Analysis of Financial Condition and Results of Operations included in our 2013 Annual Report on Form 10-K/A, filed separately with the Securities and Exchange Commission. The MD&A gives effect to the restatement of prior period Condensed Consolidated Financial Statements referred to in Note 2 Restatement of Financial Statements to the Condensed Consolidated Financial Statements contained in Part I, Item 1. This document contains statements that are, or may be deemed to be, forward-looking statements within the meaning of the Private Securities Litigation Reform Act of All statements, other than statements of historical fact, which address activities, actions, goals, prospects, or new developments that we expect or anticipate will or may occur in the future, including such things as expansion and growth of our operations and other such matters are forward-looking statements. Any one or a combination of factors could materially affect our operations and financial condition. These factors include competitive pressures, success or failure of marketing programs, changes in pricing and availability of services and products offered to customers, legal and regulatory initiatives affecting software or long distance service, and conditions in the capital markets. Forward-looking statements made by us are based on knowledge of our business and the environment in which we operate as of the date of this report. Because of the factors discussed in our 2013 Annual Report on Form 10-K/A under Item 1A Risk Factors, and factors disclosed in subsequent reports filed with the Securities and Exchange Commission, actual results may differ from those in the forward-looking statements. OVERVIEW incontact began in 1997 as a reseller of network connectivity services and has evolved to become a leading provider of cloud contact center software solutions. We help contact centers around the world create effective customer experiences through our powerful portfolio of cloud contact center contact routing, self-service and agent optimization software solutions. Our services and software solutions enable contact centers to operate more efficiently, optimize the cost and quality of every customer interaction, create new pathways to profit and ensure ongoing customer-centric business improvement and growth. We began offering cloud solutions to the contact center market in Our dynamic technology platform provides our customers a pay-asyou-go solution without the costs and complexities of premise-based systems. Our proven cloud delivery model provides compelling total cost of ownership savings over premise-based technology by reducing upfront capital expenditures, eliminating the expense of system management and maintenance fees, while providing agility that enables businesses to scale their technology as they grow. DEVELOPMENTS On May 6, 2014, we acquired CallCopy, Inc., a Delaware corporation doing business as Uptivity ( Uptivity ). Uptivity provides a complete mid-market workforce optimization suite of services to call centers comprised of speech and desktop analytics, agent coaching, call and desktop recording, as well as quality, performance, workforce management and satisfaction surveys. There were no material relationships between incontact and any of the stockholders of Uptivity prior to the acquisition. The purchase price was approximately $50.2 million, including Uptivity s unaudited adjusted net current assets of approximately $5.8 million as of the closing date, which was estimated for purposes of closing and subject to adjustment in certain circumstances and verification in a final closing balance sheet for Uptivity. The purchase price was paid with cash in the amount of $14.6 million and 4,256,244 shares of the Company s common stock valued at $35.6 million. SOURCES OF REVENUE We derive our revenues from two major business activities: (1) delivery and support of our incontact portfolio of software solutions and associated professional services and (2) reselling network connectivity services. Our primary business focus is marketing and selling our incontact portfolio. 18

20 Software Software delivery and support of our incontact portfolio is provided on a monthly recurring subscription basis. Monthly recurring charges are billed in arrears and recognized for the period in which they are earned. In addition to the monthly recurring revenue, revenue is also received on a non-recurring basis for professional implementation services or on a recurring basis related to improving a customer s contact center efficiency and effectiveness metrics, as it relates to utilization of the incontact portfolio. Customers access cloud software and data through a secure Internet connection. Support services include technical assistance for our software products and product upgrades and enhancements on a when and if available basis. Our network connectivity and data network is fundamental to our incontact portfolio and allows us to provide the all-in-one incontact solution. Software service revenue also includes revenue related to minimum purchase commitments through July 2014, from a related party reseller referred to in Part I. Item 1 Financial Statements Note 13 Related Party Transactions. Network Connectivity We derive revenue from network connectivity services such as dedicated transport, VoIP connectivity, switched long distance and data services. These services are provided over our network or through third party network connectivity providers. Revenue for transactional network connectivity usage is derived based on customer specific rate plans and the customer s call usage and is recognized in the period the call is initiated. Customers are billed monthly charges in arrears and revenue is recognized for such charges over the billing period. If the billing period spans more than one month, earned but unbilled revenues are recognized as revenue for incurred usage to date. COSTS OF REVENUE AND OPERATING EXPENSES Costs of Revenue Costs of revenue consist primarily of payments to third party long distance service providers for resold network connectivity services to our customers. Costs of revenue also include labor costs (including stock-based compensation) and related expenses for our software services delivery, professional services and customer support organizations, equipment depreciation relating to our services, amortization of acquired intangible assets, amortization of capitalized internal use software development costs, and allocated overhead, such as rent, utilities and depreciation on property and equipment. As a result, overhead expenses are included in costs of revenue and each operating expense category. The cost associated with providing professional services is significantly higher as a percentage of revenue than the cost associated with delivering our software services due to the labor costs associated with providing professional services. We anticipate that we will incur additional costs for network connectivity service providers, hosting, support, labor costs and related expenses, to support delivery of our software solutions and services in the future. Selling and Marketing Selling and marketing expenses consist primarily of labor costs (including stock-based compensation) and related expenses for employees in sales and marketing, including commissions and bonuses, advertising, marketing events, corporate communications, expenses, travel costs and allocated overhead. Since our Software segment revenue is delivered and therefore recognized over time, we have experienced a delay between increasing sales and marketing expenses and the recognition of the corresponding revenue. We believe it is important to continue investing in selling and marketing to create brand awareness and lead generation opportunities, to increase market share and to support the resellers channels. Accordingly, we expect selling and marketing expenses to increase in absolute dollars as we continue to support growth initiatives. Research and Development Research and development expenses consist primarily of the non-capitalized portion of labor costs (including stock-based compensation) and related expenses for development personnel and costs related to the development of new products, enhancement of existing products, quality assurance, market research, testing, product management and allocated overhead. We expect research and development expenses to increase in absolute dollars in the future as we intend to release new features and functionality on a frequent basis, expand our content offerings, upgrade and extend our service offerings and develop new technologies. General and Administrative General and administrative expenses consist primarily of labor costs (including stock-based compensation) and related expenses for management, finance and accounting, legal, information systems and human resources personnel, professional fees, other corporate expenses and allocated overhead. We anticipate that we will incur additional employee salaries and related expenses, professional service fees and other corporate expenses related to the growth of our business and operations in the future. As such, we expect general and administrative expenses to increase in absolute dollars. 19